- Zoom Telephonics sells modems and other devices under the Motorola brand.
- It's currently break-even, at best, but a number of catalysts could trigger meaningful profits by 2022 causing the shares to rally.
- Near-term catalysts may include: relocating production to reduce tariffs, a Nasdaq listing, growing product categories, increased B2B sales, and international expansion.
- Their strategy makes sense and could create a runway for gaining market share given the company's small size today.
- Management is strong, aligned with shareholders and potentially overqualified for a company of this size, suggesting big goals for the business.
Zoom Telephonics (ZMTP) is a small-cap growth opportunity that has demonstrated growth in excess of 20% over recent years. It will likely hit profitability in the next 12 months. Product quality is high, management is strong and well-aligned with shareholders. Zoom's plan to expand into B2B sales in addition to its current consumer channel may provide a further leg to growth. A Nasdaq listing could provide a further catalyst.
Zoom Telephonics makes cable modems and other networking equipment sold under the Motorola brand primarily. These products are sold to consumers through Walmart, Best Buy, Amazon, Target and others. It should not be confused with the video-conferencing company which is entirely separate.
Top line growth has been strong historically, though profitability continues to lag.
Source: Company Q1 presentation
The company's products are well-regarded. They sell modems primarily under the Motorola brand, and generally appear to receive 4.5-star reviews or better on Amazon. Wirecutter ranked their cable modem the best in December 2019.
The company's strategy now calls for it to add a B2B element to its B2C business. It has well-reviewed products that consumers appreciate. It makes sense for them to offer these products to cable companies to provide to their users. It's another sales channel for the business, and they have a clear story with a quality product potentially requiring less customer support to maintain. The company doesn't sell into this market at any scale today, so it's largely upside.
Product expansion into cellular modems and digital home scenarios (IP cameras, home sensors, etc.) offers further upside, as does the prospect of medium-term international expansion. Given its size, this company has a large growth runway if it can continue to execute.
Executive chairman Jeremy Hitchcock owns 20% of the shares, recently buying more in a private placement last month. He previously sold his company, Dyn, to Oracle. Jonathan Seeling, co-founder of Akamai is also on the board. These are seasoned technology executives buying shares in material amounts. It's unlikely we'd see this caliber of involvement with a $50M market cap company unless they saw potential.
The company is currently searching for a new CEO.
There are various positive catalysts for Zoom on the horizon:
- Tariff removal - the company has been hit by China tariffs, cutting gross margins from 37% to 25% and delaying a move to profitability. Management expects relocation of manufacturing to Vietnam, as they stated in their February 2020 release on Q1 earnings: "Moving our production to Vietnam will not only benefit us with a lower overall tariff exposure, but it will also further strengthen and diversify our global supply chain model."
- B2B Sales Selling through B2B channels, targeting second-tier cable companies who don't have in-house modem production should yield incremental volumes and it's reasonable to think these efforts may succeed given product quality.
- Nasdaq Listing - The company's press release of late May included this statement "The Company’s Board will also analyze and explore the costs and benefits of a Nasdaq listing as it relates to increased investor awareness, liquidity, and other factors." Again, the company clearly has aspirations beyond its current size.
The company is currently losing money. However, that may be expected to change in the coming years. Here's how that could play out.
|2019 Actual||2020 est.||2022 est.|
The above estimates assumes they are able to normalize gross margin back to 35% after relocating production to Vietnam and that they are able to capture some scale advantage in operating costs as they grow. The key point here is that the company may be close to positive profits.
- Even though the company seems close to profitability, it is loss-making today. It may require further funding in future if profitability isn't achieved in the near term.
- The company uses Motorola's brand, this agreement has been extended to 2025, but Motorola may capture some of the upside if the company is successful in contract renegotiation in the medium term.
- Though the product has had success with cable modems, new products are unproven and may not achieve traction.
- The company is currently without a CEO.
- There is some execution risk in relocating production to Vietnam and risk of supply chain disruption due to COVID-19. Though management has suggested both risks are largely behind it.
It appears reasonable that Zoom will continue to grow at 20% or more for the foreseeable future based on the market opportunity supported by product quality and historical trends. As such a 15x-20x valuation appears warranted if not conservative. Assuming $7M of pre-tax profit in 2 years taxed at 20% and discounted back to today at 10% discount rate, that's $4.60 of profits in today's dollars and on a 15x multiple that suggests a $3.30 share price with 21M shares outstanding.
This is a growth company that is currently unprofitable, but there appears to be the potential for upside for the patient investor. A Nasdaq listing may provide a further catalyst in the interim.
This article was written by
Analyst’s Disclosure: I am/we are long ZMPT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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